Earnings Surprises Lift the Market

Positive Earnings Surprises Lift the Market in January

by Louis Navellier

January 29, 2019

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The stock market celebrated wave after wave of better-than-expected fourth-quarter results last week. It appears that the analyst community was way too cautious with their 4Q earnings estimates, since many companies are providing positive guidance above analyst consensus estimates. Still, we must remember that good earnings announcements tend to come out early. By mid-February, earnings announcements may not be this strong, so I expect the market to get increasingly bumpy over the upcoming weeks.

Overall, the stock market has reverted to fundamentals, so I remain especially happy with my dividend growth and growth stocks. Small-capitalization stocks are off to an especially strong start this year. Essentially, many stocks continue to “melt up” on persistent order imbalances. Currently, an investor’s best defense is a strong offense of fundamentally superior stocks, especially “A” rated stocks on my Dividend Grader and Stock Grader, which are powerful tools that I encourage all investors to utilize. 

In This Issue

Bryan Perry takes a detailed look at the options for a hard (or soft) Brexit, with the greater likelihood of further delay. Ivan Martchev weighs Brexit in the same light and then takes a fresh look at German bonds. Gary Alexander reviews the last month’s mega-market move, along with his semi-annual review of gold as a portfolio stabilizer. Jason Bodner reviews the strong market recovery with a special focus on tech and semi-conductors. Then I’ll return with a review of ETF spreads and an update on recent political realities.

Income Mail:
Sizing Up the Impact of a Soft or Hard Brexit
by Bryan Perry
Deal or No Deal – or Maybe Just a Delay?

Growth Mail:
This Bull Market is “Snorting” Again – Going on 10 Years
by Gary Alexander
Gold is a Better Portfolio Balancer than Cash or Bonds

Global Mail:
European Bonds Are Again Flashing Red
by Ivan Martchev
Whatever Happened to “The Short of the Century”?

Sector Spotlight:
Be Willing to Fail if You Want to Win Big
by Jason Bodner
We’re Seeing Exceptional Gains in Semiconductors

A Look Ahead:
ETF Spreads Tighten Up – but Traders Beware
by Louis Navellier
Major Governments Bypass Davos for Political Reasons

Income Mail:

*All content of "Income Mail" represents the opinion of Bryan Perry*

Sizing up the Impact of a Soft or Hard Brexit

by Bryan Perry

Back in June 2016, the people of the United Kingdom (England, Scotland, Wales, and Northern Ireland) passed a referendum to leave the European Union (EU) – determining that the benefits of being members of the unified body of nations no longer outweighed their loss of sovereignty and the cost of immigration and compliance with myriad EU regulations. A majority of UK citizens claimed the #1 reason for leaving the EU is that it offered the best chance to regain control over immigration and its borders, followed by too many outside regulatory bodies having too much decision-making influence on affairs in their lives.

British exit (“Brexit”) from the EU is now facing a March 29 deadline. Prime Minister May’s 21-month transition plan with the EU was soundly defeated in Parliament in a landslide vote: 432 against to 202 in favor. As a result of the vote, the risk of a “hard Brexit” increased dramatically, meaning the UK leaves the EU with no restrictions, other than the need of a new free trade agreement that is yet to be negotiated.

The Brits are fed up with unelected EU elites in Brussels dictating to them from their lavish headquarters.

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In the eyes of the Brexit crowd, the EU stands for anti-democracy, anti-independence, the elimination of borders, mass immigration, and the creation of a federal super-state where EU officials are not held accountable for reckless spending that requires Britain to fork over billions per year to support Europe’s Big Brother and their brand of socialist “group think” that is pervasive among those in power.

There are a lot of moving parts to what the final form of Brexit will take, and hard Brexit opponents warn of the re-imposition of huge tariff increases, tens of thousands of lost jobs, huge numbers of companies leaving the UK, a collapse in real estate prices, the inability of UK companies to bid on EU contracts, tangled banking systems, jammed ports and border crossings, closed factories, higher prices for all manner of services and airfare, diminished healthcare, the possible loss of Scotland, customs delays resulting in food shortages and medical supplies, a spike in inflation, and a bear market for the pound Sterling, not to mention a lower European stock market. To put it simply, the British economy will tank.

Deal or No Deal —or Maybe Just a Delay?

This all sounds pretty dire, even if the Brexit critics are only half right, but UK citizens don’t want to be ruled by the Eurocrats that make up the European Council in Brussels. If the UK leaves, then who might leave next? Italy? It is widely accepted at this point among the EU Council that Brexit, in one form or another, is pretty much a done deal at some point, so it raises the question of whether the new populist movements in other EU member nations will evoke similar exit strategies and referenda.

While there is chatter that factions within Italy’s political parties want out of the EU, doing so would spell disaster for their already highly-leveraged banking system that is in need of a bailout by the EU – since Italy’s borrowing costs have soared since its new government unveiled a 2019 budget that sharply increased its budget deficit. Italy needs the financial support of both the EU and the ECB, now more than ever. That means there is a near-zero chance of Italy leaving the EU, but it doesn’t resolve the fact that Italy is sitting on a ticking debt bomb if it is not seriously addressed in the year ahead.

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The UK economy is the fifth largest in the world. Within the EU, it is second only to Germany’s, with a GDP of just over $2.7 trillion. Their biggest exports are mechanical and electrical machinery, automobiles, and medical and pharmaceutical products. The UK is also the seventh largest trading partner with the U.S.

It is becoming increasingly clear that a hard Brexit, where there is essentially no action plan to maintain the free flow of goods in and out of the UK, could paralyze the country for an unspecified period of time. Currently, about 50% of goods imported into the UK come from the EU and 45% of UK exports go to the EU. A hard Brexit will definitely slow the UK economy, as it posted only 1.8% growth for all of 2018.

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

With the likelihood of mutual economic destruction taking place if a hard Brexit comes to pass, those following the situation closely believe an agreement to extend the March 29 deadline will emerge in the next few weeks. The recent rally in the pound sterling would imply that scenario, meaning that a UK exit from the EU will somehow be put on hold with even the possibility of a second referendum vote to be held in the UK to determine if there is still a majority that want to separate from the EU.

Prime Minister Theresa May will take her latest modified proposal back to the Commons in Parliament this Tuesday to try to come up with a deal that UK voters can live with – maintain trade but not be subject to the long arm of Brussels dictating immigration policy and the eventual destruction of UK sovereignty.

The allure of delaying Brexit by members of Parliament is taking hold so as to avoid a hard or no-deal Brexit altogether and the calamity that would come with either outcome. At the end of the day, this will likely take place – kicking the can of EU membership down the road. And though nothing will have been resolved from over 2-1/2 years of parliamentary wrangling, the stock market will indeed celebrate delay.

Growth Mail:

*All content of "Growth Mail" represents the opinion of Gary Alexander*

This Bull Market is “Snorting” Again – Going on 10 Years

by Gary Alexander

This bull market is intact. We never reached a 20% correction in the S&P 500 on a closing basis. Last Christmas Eve brought us down 19.8% from the September 20 peak, but that was the second time that this bull market retreated over 19% without touching 20%. (The other close call was -19.4% in 2011.)

Economist Ed Yardeni calls this “relief rally #62” of the bull market. He also recalls that this is the sixth correction of 10% or more and 8th correction of 9.8% or more since the bull market began in March 2009.

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Furthermore, the market has now recovered to its levels of January 1, 2018, as 2018 began:

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What we saw in December was madness – the delusion of crowds. Mitch Zacks summarized the results of several research reports into the behavior of institutional investors as markets fell. In summary, he wrote:

“What they discovered is that one of the main reasons large institutional portfolio managers sell during market corrections is because stock prices are falling. Read that again: institutional investors sold because prices were falling. This active decision means institutional investors were largely reacting to price movements instead of changing fundamentals – which is the precise opposite of what long-term investors should do….”

If you’re a long-term investor, as I am, you tend to ride out these storms. We don’t lose any real money by holding on, just theoretical daily price tags. The market will recover. It always does, but institutional investors feel the need to “do something” to “protect their gains” (by selling), but they seldom get back in the market before a rapid increase shuts off their options for buying at a lower price than they sold, so they miss out on the rapid gains, while long-term investors never have to worry about “re-entry” prices.

Gold is a Better Portfolio Balancer than Cash or Bonds

The S&P 500 is still up 24.8% since Election Day, November 8, 2016, but it has risen so fast in the last month that maybe some diversification is due, so let me put in a kind word for gold as portfolio ballast.

Gold is a portfolio balancer. It tends to “zig” while stocks or bonds “zag.” Gold had a strong December while stocks were tanking, but it has also continued to rise in early 2019, while stocks were recovering.

Last Friday, gold hit a 7-month high of $1,303, up over 10% from its 2018 low of $1,176 set last August 17. In that same time span, stocks were mostly trending downward, as were most other commodities.

Here is a comparison of gold (upper left) vs. a smaller rise in silver (upper right), vs. outright declines in the price of crude oil and copper (bottom charts) over the same time frame (since July 2), showing gold’s unique quality as a “crisis hedge” in world affairs. By contrast, crude oil and copper are driven mostly by industrial demand and silver is a “hybrid” metal, with most of its supply coming as a by-product of other metals, and most of its demand coming from industry, with limited investor demand as ‘poor man’s gold.’

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

These prices and charts are in U.S. dollar terms. With the dollar strong, it’s important to note that gold is still down 32% from its peak of $1,920 in 2011, but gold has also recently reached (or is about to reach) an all-time high price in 72 other global currencies. Among those currencies are the Argentine peso, Australian dollar, Brazilian real, Canadian dollar, Chilean peso, Indian Rupee, Iranian rial, Japanese yen, Mexican peso, Norwegian krone, Russian ruble, South African rand, Swedish krona, and Turkish lira.

Even in U.S. dollar terms, gold has averaged 8% annual gains since Y2K (January 1, 2000), a rate of increase which far exceeds inflation, prevailing interest rates, or any major stock market index. Over the last 19 years, gold is up 349% vs. only 81% for the S&P 500 or 115% for the Dow Jones Industrials. Stocks and gold will go up or down vs. each other in any given year but it usually pays to own gold in a well-balanced portfolio. I have always tried to maintain a 5%-10% portfolio position in precious metals.

Gold’s Role in U.S. Monetary History

In late January, we can also celebrate gold’s central role in U.S. monetary history around this date:

On January 24, 1848, James Marshall discovered gold on John Sutter’s mill, at the junction of the American and Sacramento rivers in California. In 1847, the year before the California gold strike, the total U.S. production of gold was only 43,000 ounces, mostly as a by-product of base metal mining. But 1848 yielded a 1,000% gain, to 484,000 ounces. That total quadrupled again in 1849, to 1,935,000 ounces, and it peaked in 1853, at 3,144,000 ounces. This gold changed American history in many ways.

On January 24, 1894, the Treasury’s gold reserve dipped dangerously below $100 million, the warning bell for the upcoming Panic of 1894, so Wall Street investment bankers underwrote a $50 million issue of gold bonds, selling them to the public and restocking gold in the Treasury back to $107 million. Later in 1894, another $50 million bond issue was underwritten by Drexel Morgan but then, on January 24, 1895, gold reserves hit a new low of $68 million, then $45 million on January 31. This caused a gold shortage which was remedied in the nick of time by a new gold discovery up north: Klondike Gold!

On January 30, 1934, Congress passed the Gold Reserve Act, giving President Roosevelt authority to set the price of gold, on his birthday no less. On January 31, he devalued the dollar 41%, by raising the price of gold 69% from $20.67 to $35 per ounce. FDR also nationalized most gold supplies. For the next 41 years, it was a crime punishable by up to 10 years in prison and $10,000 fines to hold this inert metal.

On Friday, January 18, 1974, the first gold-oriented investment conference debuted in New Orleans, under the sponsorship of the late Jim Blanchard. Bunker Hunt attended that seminar. According to Jim Blanchard’s memoirs, “Confessions of a Gold Bug,” Hunt probably hatched his idea of cornering the silver market at that seminar, although the plan took six years to reach fruition in early 1980. On the following Monday, January 21, 1974, gold hit a record $161.31 and silver hit a record $3.97 an ounce in London, but it was still illegal for Americans to own gold until it was legalized on December 30, 1974.

On Friday January 18, 1980, silver hit $50 an ounce for one day, resulting partly from inflation fears, but mostly from a cornering of the silver market by the Hunt brothers. On the same day, gold hit $750, on its way to a then-record high of $850 on Monday, January 21, 1980. Gold would not exceed $800 for 28 years, but gold was over $800 for just a single day in 1980, and it was over $700 for only three or four days. This one-day spike to $850 was gold’s one-day “spike,” so anybody who analyzes gold’s long-term performance by beginning with this spike-high price (for comparison purposes) is trying to mislead you!

Gold will seldom beat stocks over a long (25+ year) time frame, but gold is not designed to compete with stocks. I view gold as competing with cash or bonds as a wealth-protection anchor in a prudent portfolio.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

 

Global Mail:

*All content of "Global Mail" represents the opinion of Ivan Martchev*

European Bonds Are Again Flashing Red

by Ivan Martchev

As the soft (EU-deal) Brexit or hard (no deal) Brexit deadline approaches at the end of March, one has to keep an eye on the euro and major European bond markets, since Brexit, by definition, has weakened the core of the European Union and the eurozone, even though technically Britain is not part of the euro.

The failure of Britain to join the euro stems from George Soros, who benefited handsomely from its withdrawal from the European Monetary System in 1992. I find it rather ironic that a brilliant trader like Soros helped force Britain out of the EMS quite profitably, yet Soros the philanthropist has been one of the most outspoken opponents of Brexit! If the philanthropist had overpowered the trader’s instinct and Britain was part of the euro today, it is entirely possible that there would not have been a Brexit vote.

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Still, with Brexit approaching, the safest government bonds in Europe – the German bunds – closed last Friday with yields of just 0.19%, or 19 basis points (in bond traders’ lingo). It is true that Germany had some rather disturbing economic data, as its industrial production fell 1.9% in November for a third consecutive down month. France, on the other hand, had a populist outburst in the face of the “yellow vest” movement, and French government bonds closed Friday with a yield of just 60 basis points (0.6%).

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

One reliable indicator of the level of financial stress in the eurozone – recalling the days of the old eurozone crisis in 2011 – was the so-called Franco-German spread, which can expand considerably more than its present level of 41 basis points. This would be a good indicator of where things are headed in the eurozone, as well as the government bonds yields in Italy, where a stagnant economy and high debt levels brought a euro-sceptic government into power. The spike in Italian government bonds in 2018 is called a “deflationary” rise in interest rates, since it reflects the fear that the Italian bond market will not clear, based on the government budget fight with the EU and its ongoing desire for massive deficit spending.

I think that any Brexit, hard or soft, is bad for the EU and the eurozone. I suppose a soft Brexit is better than a hard one, but the withdrawal of Britain leaves the eurozone and the EU weaker and vulnerable to dissolution. For example, the EU could not survive the withdrawal of Italy, which (given its stagnant economy) has chosen to put a euro-sceptic government in power.

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I find it fascinating that the German 2-year federal notes that go by the name “bundesschatzanweisungen” (dubbed Schätze notes, to avoid tongue injuries) closed at -0.59% on Friday. The Schätze notes never got out of negative territory after they finally declined below zero in late 2014. To me, the negative-yielding Schätze say that Europe never got out of the woods when it flirted with deflation in 2015 and 2016. The negative-yielding Schatze notes say that the risk of dissolution of the eurozone never disappeared.

Whatever Happened to “The Short of the Century”?

In 2015, Barron’s ran a column in its “Up and Down Wall Street” section called “German bunds: The Short of the Century.”  The article quoted both Bill Gross of PIMCO fame, and Jeffrey Gundlach of Doubleline Capital expressing negative views on German bunds. Bill Gross focused on the 10-year bunds, while Jeffrey Gundlach focused on the negatively-yielding Schätze notes. Both used very strong language to describe their views on this “short of the century” or “the short of a lifetime.”

It turns out that neither the bunds nor the Schätze notes were very good short ideas, as the bunds are again flirting with negative yields (19 basis points above zero) and the Schätze never left negative territory.

The German bund performance tells me that the problem of eurozone deflationary pressures is very serious and it is probably not confined to the eurozone. It certainly exists in Japan and may later show up in China, where the credit bubble created by 25 years of lending quotas gives all indications of bursting.

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Any eurozone deflation is good news for U.S. Treasury yields, as they are the highest of any developed country, so U.S. bonds will see strong demand. Despite record issuance of Treasuries in 2018, to the tune of $1.3 trillion, and the balance sheet unwinding by the Fed, it is entirely possible that we saw the highs of 3.25% of 10-year Treasury yields for this cycle, and it is all downhill from here for Treasury yields, although  a retest of 3.25% cannot be ruled out later in 2019, based on the record issuance planned.

In the next recession in the U.S., whether that is in 2020 or 2021, I expect U.S. 10-year Treasury yields to drop to 1% or lower due to deflationary pressures and unorthodox central bank monetary policy. This should be good news for conservative dividend strategies and quality corporate and municipal bonds.

Sector Spotlight:

*All content of "Sector Spotlight" represents the opinion of Jason Bodner*

Be Willing to Fail if You Want to Win Big

by Jason Bodner

President John F Kennedy said: “Those who dare to fail miserably can achieve greatly.”

That should be the mantra for those who choose to invest in financial markets. The image of “easy riches,” by making money at your poolside, is the dangled carrot cruelly offered by brokerage-firm advertisers. We all know that the market is fraught with danger and difficulty. Last year’s finish was testament enough of this fact. Making money in the market is hard…unless of course you have an edge.

Some edges are from expertise or lifelong careers built on experience. Others can be less savory. While JFK was a tragic and beloved historical figure, it may surprise you to learn that his dear-old-dad built the family fortune on insider trading. In 1919, Joseph P. Kennedy joined the brokerage firm Hayden, Stone & Co. and quickly became an expert in the then-unregulated stock market. He used tactics that are now considered insider trading and market manipulation. Among other things, he bribed reporters to spread stories in an information-starved age of stocks to drive prices up for his investment pool. He also participated in organized “bear raids” to crush prices when he was short. He supposedly said it was time to get out of the crazed speculation-fueled market when he got stock tips from a shoe-shine boy. He then shorted heavily in 1929 and made a fortune worth $4 million (about $60 million in today’s money). Then he invested heavily in real estate and grew his wealth to $180 million (about $3 billion today).

As if all that wealth weren’t enough reward for insider trading, President Franklin D. Roosevelt made Joseph Kennedy the head of the SEC from 1934 to 1935! When asked why he did it, FDR said, “Set a thief to catch a thief.” Kennedy went on to outlaw the very practices that made him rich.

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While we’re on the subject of profiting handsomely from the market, let’s focus on the right way to profit. Since January 4th the market has rocketed higher, with only a glance or two backwards. Looking below you can see that the major indexes’ 1-month performance looks more like what you would expect to see for a normal 24-to-36-month performance. The small- and mid-cap space got most of the love.

This is consistent with what our data shows: Of all the signals we are seeing over the last 14 trading days – 81% are buys!  While this is not sustainable forever, our MAP-IT ratio just popped over 50%. (Remember that study we put out that showed that’s very bullish for 1-to-12 months’ forward returns?)

We’re Seeing Exceptional Gains in Semiconductors

The strongest sector performance for 1-month belongs to Consumer Discretionary, Energy, Financials, and Industrials. The least-strong sectors were Consumer Staples and Utilities, so we are definitely witnessing a 1-month rotation out of defensive sectors and into growth. The real winner – as we’ll delve into more detail in a second – is the PHLX Semiconductor index, up 18.6% in the last month!

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Last week showed a little slowing of upward momentum, but only at face value. What we actually saw last week was strength under the surface. While Real Estate and Utilities saw a decent pop last week, the average return for all 11 sectors was flat. This is one of those times when drilling down a level further in your analysis is fruitful. Once again, we see strength in Semiconductors last week, at +4.3%!

This makes sense. I believe traders were heavily short in semis. We saw a ton of selling late last year. But now, we see stocks like Apple (AAPL) guide down, only to recover quickly. For instance, Apple CEO Tim Cook’s letter to investors on January 2nd had the CEO guiding down, citing lower phone sales than expected. Obviously, this hit Apple, but it also pressured semis and Apple suppliers.

But now, Apple is back to where it was before their CEO turned all negative. Notice how buying picked up significantly late last week in Semis: top names in the space were stocks like Lam Research (LRCX), which reported solid earnings and also announced a $5 billion-dollar buy-back. This is significant, given that LRCX has only a $22 billion market cap, so $5 billion in buying sent the stock up in a big way.

Navellier & Associates owns AAPL in managed accounts and or our sub-advised mutual fund but does not own LRCX. Jason Bodner does not own AAPL but does own LRCX in a personal account.

I believe the negative sentiment (reflected in the news) is getting shrugged off more and more, so as the market moves into a more bullish tone, I expect to see more upbeat headlines. That’s when you should be watchful, as eventually we will see another correction. But what we see here is unusual institutional buying picking up, focused on some growth-sensitive areas like semis and consumer discretionary.

The fear is dissipating after the massive washout last year. As I’ve written a lot lately, I’m confident that December was just a big, ugly, hairy washout due to forced selling by ETF managers. I think we are moving into a new phase of the bull market, which is more selective. The headlines are still rife with uncertainty over trade, government shutdowns, and North Korea, to name a few, but these stories have kept the Mueller investigation out of the news until last Friday, when Roger Stone was dramatically arrested at his home in Fort Lauderdale. The truth is, the market doesn’t seem to care about this soap opera material the way it supposedly cared last fall and winter.

As we move out of darkness, we will continue to tell you where we see the market going, and what that may mean going forward. Right now, buyers have firm control once again, and we foresee higher prices.

JFK’s dad made his loot breaking rules that weren’t written yet, only to become the one to write them. The current state of the market makes me think of his son JFK’s fitting quote: “We are not here to curse the darkness, but to light the candle that can guide us through that darkness to a safe and sane future.”

A Look Ahead

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

ETF Spreads Tighten Up, but Traders Beware

by Louis Navellier

Despite a positive undercurrent, volatility returned last week. I have been carefully monitoring ETF spreads to see if the stock market is finally becoming “normalized.” I am happy to report that the abnormally-wide ETF spreads in the fourth quarter – which complicated and deepened the correction – tightened up, which is important for investor confidence. Unfortunately, ETF spreads remain elevated.

For example, last Wednesday, an hour after the market opening, DVY was trading at a 19-cent spread (0.2%), while SPY was trading at a $1.08 spread (0.4%), according to Morningstar’s Intraday Indicative Value. DVY and SPY are two of the biggest and most liquid ETFs traded. ETF spreads tend to tighten up at the market’s close, so if you are trading ETFs, I strongly recommend that you buy or sell ETFs near Morningstar’s Intraday Indicative Value via a limit order, or near the market close, when spreads tighten.

To give you an idea of the wide spreads that dominated the ETF market in 2018, according to research by our friends at Bespoke Investment Group, SPY rose 13.1% in 2018 “after hours,” when the stock market was closed, but it declined 17.2% during regular trading hours in 2018. Clearly, this 30.3% performance differential in the most liquid, largest, and oldest ETF is disturbing, as it undermines investor confidence.

I should add that Wall Street’s new invention of “no transaction fee ETF trading” does not eliminate the ETF spread, just the brokerage commission. Essentially, this is how selected ETF firms pay brokerage firms for order flows, but there are all-too-often extra charges if an investor sells ETFs a bit too quickly.

The ETF spread dilemma is thoroughly discussed in Jason Bodner’s new report, ETF-DOOM Sharks. This white paper also discusses how the growth in both algorithmic trading and ETFs has made the stock market much more volatile, which essentially triggered the recent stock market correction. Jason is a former institutional ETF trader and has unique insights into ETF trading that serious investors must read.

Interestingly, Jim Cramer is calling for the SEC to investigate the “Christmas Eve crash” that was caused largely by panic ETF selling pressure. Ironically, Christmas Eve marked the recent low for all major market averages – and the first day of the government shutdown. The SEC was one of the first agencies shut down – since it ran out of funding on December 26th, the day the market started recovering.

Major Governments Bypass Davos for Political Reason

The World Economic Forum in Davos, Switzerland last week was not anywhere as big as it had been in previous years. President Trump and all official U.S. government delegates canceled their trip due to the U.S. federal government shutdown, while French President Emmanuel Macron and British Prime Minister Theresa May also bypassed Davos due to domestic unrest and the Brexit mess.

Nonetheless, Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, got attention in Davos when he said, “What scares me the most longer-term is that we have limitations to monetary policy … which is our most valuable tool [and] we have greater political and social antagonism.”  Dalio said that the Fed’s limited monetary policy toolbox, rising populist pressures, and other issues, including rising global trade tensions, are similar to the backdrop leading to the Great Depression in the late 1920s. Obviously, by implying that the current environment is increasingly like the years that preceded the Great Depression, Dalio got a lot of media attention, but his comments did not impact the financial markets.

If there is an impending global event that we need to pay attention to, it is the implementation of Brexit on March 29th. Britain apparently has no intention of paying the billions of pounds or euros in exit fees that the European Union (EU) is demanding. Furthermore, the euro and the British pound are not acting well on fears of what might happen. If anything, the U.S. is expected to continue to be an oasis for international foreign capital that may be fleeing both the euro and the British pound. As a result, Treasury yields may decline sharply as we approach March 29th if Brexit does not go smoothly.

Venezuela is in the midst of a crisis as some military members increasingly reject President Nicolas Maduro. On Wednesday, the U.S. followed Brazil and other Latin America countries by recognizing Juan Guaido as Interim President of Venezuela. Guaido is the head of the Venezuelan National Assembly and is increasingly backed by Venezuela’s citizens and military leaders. In the meantime, President Maduro terminated diplomatic relations with the U.S. and gave U.S. diplomatic personnel 72 hours’ notice to leave. It is uncertain how any Venezuelan oil refined in the U.S. will be impacted by this chaos.

Despite the deal on Friday to temporarily reopen the federal government for three weeks, the State of the Union will likely be delayed until after the Super Bowl. In the meantime, the relationship between President Trump and Speaker Pelosi appears to be worse than ever, because Ms. Pelosi informed President Trump earlier last week that he was not welcome to speak in the House Chambers while there was a federal government shutdown. Specifically, Speaker Pelosi said that President Trump would be welcome to speak on “a mutually agreeable date for this address when the government has been opened.” 

Interestingly, the stock market rose well over 10% during the federal government shutdown, so I would not worry overly about the market’s reaction to another possible shutdown in upcoming months.

First-quarter GDP is now expected to be flat due to the federal government shutdown and severe winter weather in the Midwest and Northeast. Furthermore, the economic news released last week was not very promising. On Thursday, the Conference Board announced that its Leading Economic Index (LEI) declined 0.1% in December, which is not surprising, since the stock market, Treasury interest rate spreads, and building permits are some key LEI indicators. Ataman Ozyildirim, Director of Economic Research at The Conference Board, said, “While the effects of the government shutdown are not yet reflected here, the LEI suggests that the economy could decelerate towards 2% growth by the end of 2019.”

On Tuesday, the National Association of Realtors announced that existing home sales plunged 6.4% in December to an annual pace of 4.99 million, the slowest annual pace in over three years (since November 2015). In 2018, existing home sales declined 3.1% to 5.34 million as higher interest rates and rising home prices curtailed sales. Median home prices rose 2.9% in 2018 to $253,600 and are expected to continue to moderate in the upcoming months due to fewer buyers. Overall, due to the federal government shutdown and severe winter weather, existing home sales are expected to remain weak for the next two months.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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